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PaperclipPerfector  10mo ago (text post)   3402 thread views

Small-Scale Question Sunday for July 2, 2023

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Got an economics question:

I was watching 'Margin Call' the other day, and there is a scene where two day traders are lamenting the (then incipient) 2008 financial crisis. The senior of the two gives his justification for existing to the other:

the only reason they [normal people] all get to keep living like this is because We've got our fingers on the scale in their favour. I take it off, then the whole world gets really fucking fair really fucking quickly and nobody actually wants that.

Is there anything to this? if so, how does that work? I always assumed that day traders basically created no value and just shuffled wealth around to nobody's benefit.

Government subsidies for housing are massive:

  • You get to deduct the interest and property tax (conditional on exceeding the standard deduction today). However many urban homes are going to be close to this so it doesn't take much charitable giving to exceed the standard deductions.

  • You don't pay capital gains on your homes appreciation. Up to $500,000 fo couples.

  • Freddie Mac and Fannie Mae will buy most mortgages offering a guaranteed rate for 30 years that can be refinanced without penalty. The government will directly buy riskier mortgages.

  • The standard mortgage offers 4:1 leverage (or 32:1 for the government options).

These reduce the cost of housing and give strong incentives for people with high incomes and higher marginal tax rates to invest heavily in housing. The system kind of broke when those homeowners figured out they could vote in local governments that would also limit construction.

Deductions for mortgage interest and property taxes increases the price of housing, rather than decreasing it, by increasing demand. They de facto increase the ability of buyers to pay higher prices, by reducing the monthly cost of home ownership. Ditto re Fannie and Freddie, since they have the effect of lowering mortgage rates.

The monthly cost of their lifestyle was how I interpreted the quote's point. "We (society) put our fingers on the scale to make people's lifestyles more affordable" in the context of the 2008 financial crisis it ties into housing, so I view the topic as essentially "how does society put their finger on the scale of monthly housing costs to make normies lifestyles more affordable?"

Oh I was referring specifically to "These reduce the cost of housing"

Ah I should have said carrying cost! Thanks

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